Pentagon to Shop at Amazon: A $53 Billion Gift Under the GOP Budget Bill

November 26, 2017David Dayen /The Intercept

The House and Senate tax bill committees have approved a controversial "Amazon amendment" that would turn over federal procurement of off-the-shelf items, a $53 billion market, to e-commerce portals. The provision would guarantee billions of dollars in new revenue to Amazon. "It seems like Amazon wrote it," said Stacy Mitchell of the Institute for Local Self-Reliance, "It will accelerate the transfer of more and more government spending to Amazon."

(November 10 2017) -- Under pressure from anti-monopolists, House and Senate negotiators tweaked the controversial "Amazon amendment" this week, but waved it through nonetheless. The provision seeks to turn over federal procurement of commercial off-the-shelf items, a $53 billion market, to e-commerce portals. And with Amazon as the runaway leader in that space, critics say that even with the modifications, the provision still favors the online retail giant, giving it a pathway to billions of dollars in new revenue.

The gift bound for Amazon underscores the limits of President Donald Trump's Twitter politics, as his routine denunciations of the company for its affiliation with The Washington Post have done little to dampen its clout in Congress. (Amazon founder Jeff Bezos owns the Post.)

As The Intercept reported last week, the House-passed version of the National Defense Authorization Act, the annual bill setting defense policy, would let Pentagon purchasing officials acquire office supplies or furniture from private-sector websites, instead of through long-term contracts with suppliers or a government catalog managed by the General Services Administration. The stated goal was intuitive: to reduce costs and create simplicity in procurement, as well as to eventually roll out the program across the government.

The Senate did not include the provision in their version of the bill, but it made it into the conference report, which was posted to the House Rules Committee website on Thursday.

Congressional aides insisted Amazon would not be the sole winner from the deal. "Legislative intent was never to restrict participation to Amazon/Walmart-like one-stop shop portals, but to include specialized vendors as well," said Claude Chafin, a spokesperson for the House Armed Services Committee. He cited the reference to industrial supply company W.W. Grainger in the committee's summary of the legislation as proof that plenty of online sellers would be eligible.

To the extent that that's true, it's because lawmakers changed the language in the conference report. The House's version stated that eligible platforms must offer multiple suppliers for the same product, with constantly changing selection and prices. That requirement for third-party sellers would have limited marketplaces to Amazon and to a lesser extent Walmart.

But that language is no longer in the final text. Gone is the phrase "online marketplaces" in favor of "e-commerce portals." Among the explicit goals of the new system is "enhancing competition." The only requirements for eligible portals are that they are "widely used in the private sector" and feature what everyone has come to expect from online retail (updated selection, reviews, customer service).

The other major change is a drawn-out implementation plan, which replaces much of the amendment's more detailed language. The plan requires deep analysis of portal functionality and customization, integration with existing federal law, supply-chain risks, data security, which products will be allowed for purchase, and what fees will be imposed for participation.

The General Services Administration has at least two years to award contracts and finalize implementation and oversight of the program.

Despite this more deliberate process, critics still see the program as tailor-made for Amazon to dominate. First of all, no online retailer has as large a footprint as Amazon, which is responsible for almost half of all e-commerce sales. Procurement officials are as likely to lean on Amazon as any other consumer, especially because of the array of third-party sellers supplying at least a semblance of competition in one site.

However, Amazon charges third-party sellers for the privilege of using its platform, anywhere between 15 and 20 percent of gross sales. If Pentagon procurement, and potentially all federal procurement, shifts predominantly to Amazon, it would collect billions of dollars annually without doing much of anything.

And in addition to hosting third-party sales, Amazon competes against those third parties with its in-house brands, armed with superior data to know what gets purchased and what doesn't. Procurement officials will be susceptible to Amazon's usual suite of behavioral nudges, like adjusting search results or controlling what gets into the "buy box," the top option it suggests for purchases.

Plus, the whole concept of relying on web portals for everyday purchases gives away the government's leverage to buy commercial items in bulk at a superior price to the open market.

Meanwhile, Amazon has focused intensely on government procurement of late. Amazon Business, the company's business-to-business platform, has leaped to over $1 billion in sales in just two years of operation. It recently introduced a Prime membership with free two-day shipping, an announcement that tanked Grainger stock.

Amazon hired the former chief acquisitions officer of the United States, Anne Rung, to run Amazon Business's public sector division and has signed numerous local government contracts and federal agreements. The company has lobbied on the NDAA and the "modernization of the procurement process" this year, according to federal disclosures.

"This amendment looks like it will crown Amazon as an official gatekeeper to government procurement," said Lina Khan of the Open Markets Institute. "Government spending that was previously dispersed across hundreds of distinct companies will now instead all be channeled through one company, with Amazon collecting a tax."

The amendment retains the language that using the portals can satisfy small business purchasing requirements. Because Amazon charges third-party sellers for use of the platform, it means a significant portion of what small businesses earn from government spending would leak through to Amazon.

The NDAA, one of the few bills Congress passes every year, now goes to the House and Senate for final approval. It's not expected to face much opposition. Few members of the conference committee interviewed by The Hill even knew of the existence of the Amazon amendment, let alone rank-and-file representatives.

(November 2, 2017) -- This week, representatives of three major internet platforms -- Google, Facebook, and Twitter -- are testifying before Congress about their role in facilitating Russian meddling in the 2016 election. But a fourth giant sat comfortably removed: Amazon.

Instead of getting yelled at by lawmakers, Amazon is on the verge of winning a multibillion-dollar advantage over retail rivals by taking over large swaths of federal procurement.

Language buried in Section 801 of the House-passed version of the National Defense Authorization Act, which is being hashed out in a conference committee with the Senate, would move Defense Department purchases of commercial off-the-shelf products to "online marketplaces." Theoretically, that means any website that offers an array of options for paper clips or office furniture; in reality that signals likely dominance for Amazon Business, the company's commercial sales platform.

Section 801 stipulates that the program should be designed "to enable Government-wide use of such marketplaces." Scale, then, is key. Over time, this change would give platforms like Amazon access to all $53 billion in federal government commercial item purchases.

"It seems like Amazon wrote it," said Stacy Mitchell of the Institute for Local Self-Reliance, which has written critical reports about Amazon in the past. "It will accelerate the transfer of more and more government spending to Amazon."

The online marketplace provision, which still has to get through a House-Senate conference, coincides with a significant ramp-up for Amazon Business, which only launched in 2015. Last week, the company introduced Amazon Business Prime, a $499 membership that comes with free two-day shipping for its business-to-business products. The announcement tanked the stock prices of its main industrial supply competitors, Fastenal and W.W. Grainger.

Amazon Business has already surpassed 1 million customers and $1 billion in sales. Its business-to-business growth made up part of its 34 percent revenue increase in the last quarter. But federal procurement is the holy grail, the lucrative market to tap. Perhaps that's why, for the head of Amazon Business's public sector division, the company hired Anne Rung, who ran the Office of Management and Budget's Office of Federal Procurement Policy until fall 2016. This made Rung effectively the top purchasing officer in the United States.

"She probably can't go back and lobby [her former colleagues at OMB] based on the cooling-off period," said Scott Amey, general counsel for the Project On Government Oversight, referring to federal ethics laws. "But nothing would prevent her from lobbying others on Amazon's behalf."

The idea for online marketplaces came out of the House Armed Services Committee and its chair Mac Thornberry; he initially put the proposal in a standalone bill. Currently, to acquire off-the-shelf items like bottled water or pencils, government agencies sign long-term contracts with suppliers or use the General Services Administration "schedules," a kind of catalog which sets prices for procurement.

In its NDAA summary, the committee argues that this is too burdensome and too expensive, citing a recent inspector general report showing higher-cost IT products in the GSA schedules than on the open market. "A solution is obvious to most consumers," concludes the summary, "allow the government to use online commercial sites like Amazon, Staples, or Grainger just as businesses do."

The definition of an "online marketplace" merely refers to a commercial, non-government portal selling products. And GSA, under the law, must select more than one online marketplace for this purpose. But eligible platforms must offer multiple suppliers for the same product, with constantly changing selection and prices. "I don't think Grainger does that," said Mitchell. "Every reference implies we're talking about a platform where third parties are selling. If that's the case, we're talking about Amazon, Walmart [through its e-commerce site Jet.com], and not really anybody else."

Indeed, Section 801 has been informally dubbed the "Amazon amendment," and experts believe only one or two companies would have the wherewithal to participate. That means monopoly or duopoly control of $53 billion in federal purchasing.

The online marketplaces, which can be given no-bid contracts, explicitly eliminate the need for government procurement officers to seek out competitive bids for commercial products. As long as they visit the marketplace, that would satisfy any rules about competition, because of the multiple sellers on that platform. But that assumes the platform is a neutral arbiter of what gets purchased.

Amazon not only hosts third-party sales, it competes against those third parties with its in-house brands. Amazon places costs and parameters on third-party sellers on its platforms that can inhibit their ability to compete. And the company has mastered the technique of driving buyers to preferred products, by adjusting search results, or controlling what gets into the "buy box," the top option it suggests for purchases. Often those preferred suggestions cost more than rivals.

"I don't think what's happening on Amazon is a market," said Mitchell. "It's a private arena that Amazon controls."

Even if Amazon always served up the best alternative for any product, it extracts money from third-party sellers for the privilege of using the platform, of anywhere between 15 and 20 percent. If Pentagon procurement, and potentially all federal procurement, shifts predominantly to Amazon, it would collect billions of dollars annually without doing much of anything.

The online marketplaces would satisfy small business purchase requirements as well, meaning that a significant portion of what small businesses earn from government spending would leak through to Amazon. A 15 percent skim could represent as much as half of a small business profit margin.

Holding data on regularized federal spending decisions can also prove valuable. "I can imagine Amazon saying, we looked at the data and can make a lot of money selling the Defense Department chairs," said Mitchell. "We'll either arbitrarily or through a rule change or increase in fees induce the fiercest competitor in making chairs to leave the portal. And we'll own that business."

With the bill mandating dynamic pricing, Amazon can also capitalize on data. If it knows that procurement officials are less attentive buying products on a Friday afternoon, or that they always buy a certain product on a certain day of the month, Amazon can jack up prices at those moments.

This is also another troubling example of government outsourcing. The GSA schedules were created for the purpose of buying commercial items in bulk at a better price than the open market, which makes sense because the government is the nation's largest purchaser. "There's a thought GSA isn't getting the best prices," said Scott Amey of POGO. "My feeling is, I don't want to pay what other businesses pay." In this sense, the government would be effectively giving up its leverage to Amazon.

Technically speaking, there are safeguards in the proposal to prevent ripoffs. A marketplace cannot feature any product based on an exclusive fee; procurement officials are supposed to be able to screen for suppliers and products that have been suspended from government contracting; the GSA is supposed to get full purchase data, including comparison prices from other suppliers. "For the government, that kind of transparency and accountability would be revolutionary," the House Armed Services Committee report states.

But by the time GSA gets the data, the purchases will already have been made. After-the-fact GSA reports might improve matters over time, but billions could be lost in the process. And Amazon doesn't have to take fees to feature its own products; they can just blame it on the algorithm.

Amazon has targeted government purchasing at the local level. In January, the company won a contract with U.S. Communities, a coalition of 90,000 local governments. Amazon famously spent years denying the payment of sales tax to local governments; now it's a major supplier of local government office supplies. Federal agencies also have accounts with Amazon, including at the Department of Homeland Security. "They want to be the go-to source at every level of government," Mitchell said.

The Senate version of the NDAA, one of the few bills Congress passes every year, does not include the online marketplace provision, meaning a compromise will have to be reached. Negotiations in the conference committee began two weeks ago, and in earnest in the last week. There's no timeline on when that might be completed.

The Coalition for Government Procurement, an assembly of federal acquisition experts, recommended last month that Section 801 be made into a pilot program, calling the proposal "the most consequential procurement policy changes in a generation." CGP wants to test compliance with statutory requirements, impact on small business, the use of data and fees, and other unintended consequences.

"Don't hand over all our purchasing to Amazon," Mitchell said, referring to the conference committee. "The lack of transparency and accountability is astonishing. Whatever problems there may be with the GSA, this would only compound the same issues."

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